In this series about Pricing Models in outsourcing the author gives a detailed overview about advantages and disadvantages of the different pricing models that are available and in use today. Learn which model might work best for your projects and how to optimize your outsourcing-contracts.
Along with the globalization of Information Technology (IT) – related work, IT outsourcing has evolved to become mainstream in many organizations, both large corporations and startups alike. Such a labor arbitrage strategy is being increasingly exploited by many organizations through partnerships, joint ventures, captive operations, etc. to establish sustainable competitive advantage. Such an approach helps decrease costs, improve delivery, and access a broader talent pool of skills, etc. towards developing price and performance effectiveness.
A fixed price model is also called a Lump Sum model and is an ideal pricing mechanism for projects with a clear scope, established project management methodologies, and a stable set of requirements. The teams at both, the client and service provider organizations have a good grasp of project requirements, have established a conducive working environment, are aware of each other's' skills and capabilities, etc. Hence, the service provider furnish extensive amount of details on how the project will be executed before project kick-off. In this model, the requirements are so clear that periodic deliverables at agreed upon timelines (milestones) could be expected.
Managing fixed price projects required a lot more professionalism, as the project risks are borne entirely by the service provider. Hence, scope creep and scope changes are difficult to undertake without incurring extra costs or reduced profits. Rigorous project monitoring and control, quality assurance (QA) and control (QC) and cost control are critical in executing fixed price projects.